# How to Calculate Pro Forma Annual Salary Expense

by Bryan Keythman

A pro forma financial statement shows projected amounts that a company expects to generate in a future accounting period. You can calculate a company's pro forma annual salary expense to determine how much it may pay its employees over the next year, which can affect its profit. A company's profit equals its revenues minus its expenses. A higher annual salary expense reduces a company's profit more than a lower expense. You can calculate the pro forma expense using the percentage of sales method, which assumes a company's expenses will remain in proportion to its sales in future years.

1. Locate a company's income statement in its most recent annual report and in the previous year's annual report. Locate the company's sales on its most recent annual income statement and on its previous annual income statement. You can get a company's 10-K annual report for free from the U.S. Securities and Exchange Commission's EDGAR online database (sec.gov/edgar/searchedgar/companysearch.html). For example, assume a company's most recent annual income statement shows \$44,000 in sales and its previous annual income statement shows \$40,000 in sales.

2. Subtract the previous year's sales from the most recent year's sales. Then divide the result by the previous year's sales to calculate the percentage growth rate in sales. A positive result represents an increase. A negative result represents a decrease. In this example, subtract \$40,000 from \$44,000 to get \$4,000. Then divide \$4,000 by \$40,000 to get 0.1, or a 10 percent growth rate.

3. Add the growth rate to 1. Then multiply the result by the most recent year's sales to calculate the estimated sales for the next year. In this example, add 0.1 to 1 to get 1.1. Then multiply \$44,000 by 1.1 to get \$48,400 for next year's projected sales.

4. Find the company's annual salary expense on its most recent annual income statement. Then divide that amount by the most recent year's sales to calculate the salary expense as a percentage of sales. In this example, if the company's salary expense was \$2,000 in its most recent year, divide \$2,000 by \$44,000 to get 0.045.

5. Multiply last year's salary expense as a percent of sales by the projected sales for the next year to calculate the pro forma salary expense for the next year. In this example, multiply 0.045 by \$48,400 to get \$2,178 in annual pro forma salary expense. This means the company's profit may be reduced by \$2,178 in salary expense over the next year compared to \$2,000 in the most recent year.